Shares of McDermott International Are Plummeting Today -- Here's Why

By Tyler

What: Shares of McDermott International have slid 13.5% as of the time of this writing following the company's analyst day. While there were some positives in the report, one aspect that stood out was the company's 2016 guidance, which doesn't instill a lot of confidence.

So what: As an engineering contractor for the oil and gas industry, McDermott's success is largely dependent on the spending of producers. Even more important for McDermott is the spending related to deepwater and conventional field work. So far this year, though, shares of McDermott have held up relatively well. A big reason for that is that the company has secured some large Engineering, Procurement, Construction, and Installation contracts from Saudi Aramco and some of the other national oil companies in the Gulf regions.

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This may help to keep the business running for some time. What seems to be spooking investors today is that the company hasn't secured many contracts outside that region, and with several contracts set to expire in 2016, McDermott could have a lot of unproductive assets outside the Middle East

Image source: McDermott International investor presentation.

With so many of these contracts getting completed, McDermott is expecting EBITDA for 2016 to come in around $210 million-$220 million, about 25% lower than EBITDA for the past 12 months. When accounting for anticipated interest expense and taxes, McDermott is actually expecting a loss for FY 2016.

Now what: McDermott lives in a pretty unique space of the oil and gas industry. It plays an immense role in the design and construction of the infrastructure needed on the big oil and gas projects like deepwater platforms and supergiant conventional reservoirs. With so many producers scaling back their spending, though, it may be quite some before McDermott's services are in high demand again.

Investing in McDermott today is a reflection of your outlook on the oil and gas industry. If you think a quicker turnaround is coming in the industry, then shares of McDermott might look rather attractive at today's prices. However, if you believe in the "lower for longer" mantra that many oil and gas execs are espousing, then it may be best to sit out this stock for a while.

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